Failures in Urban Capital Markets and Consequences for Project Funding

Abstract

Public authority interventions are a justified means to remedy market failures. We apply this idea in the context of urban development projects by analysing the three main market imperfections, namely external effects, imperfect competition and incomplete information. For (combinations of) the three types of imperfections, we derive whether funding is appropriate at all and which are suitable types of funding – either grants or success-dependent measures. Depending on the sensitivity to the respective imperfections, we categorise a range of urban development projects which are suggested to be chosen for Urban Development Funds under the JESSICA initiative. Finally, we suggest a procedure for the general screening of regions suitable for funding through Urban Development Funds.